Australia Central Bank Holds Fire, Saves Rate Ammunition

Australia's central bank on Tuesday kept interest rates steady at 3.25 percent, confounding
hopes for a cut, saying stimulus already in the pipeline was helping the country avoid the depths of recession seen elsewhere.

The Australian dollar jumped over half a U.S. cent while bill futures tumbled after the Reserve Bank of Australia (RBA) called a pause to easing, having already cut its key cash rate by a massive 400 basis points since September.

"Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead," RBA Governor Glenn Stevens said in a brief statement.

"On this basis, notwithstanding evident economic weakness at present, the Board judged that the stance of monetary policy was appropriate for the moment," he concluded.

Stevens did leave the door open for more action if needed,  saying the RBA would reconsider rates at its April meeting.

But that was cold comfort for investors who had bet rates would be at 2.75 percent by today and nearing 2.25 percent by April. With that timetable in disarray, April interbank futures sank 0.225 points, implying a rate of 2.92 percent.

The RBA's pause is in stark contrast with its peers. The Bank of Canada should ease later on Tuesday, while the Bank of England and European Central Bank are both expected to cut on Thursday.

The U.S. Federal Reserve cut its rates to near zero in December, exhausting its conventional means to support growth, and is now looking at more unorthodox policy tools to revive the economy and battle a vicious credit crunch.

But the RBA pointed to the relatively resilient performance of the Australian economy, helped by historically low mortgage rates and a sound banking system.
     
Trade To The Rescue

Government data out on Tuesday showed exports had held up remarkably well last quarter even as many of Australia's major trade partners sank into recession, while imports dived.

As a result net exports contributed a huge 1.5 percentage points to economic growth in the fourth quarter, the best result in 11 years.

That in turn greatly lessened the risk that gross domestic product (GDP) figures out on Wednesday would show the first contraction in eight years.

An updated Reuters poll of 21 analysts on Tuesday found the median expectation was for growth of 0.2 percent in the fourth quarter, and 1.2 percent for the year.

There was also evidence that past stimulus was supporting consumption, even as consumer confidence crumbled beneath the weight of global gloom.

The government reported retail sales rose 0.2 percent in January, when forecasts had been for a 0.6 percent drop.

That came on top of a brisk 3.8 percent jump in December and testified to the power of A$10.4 billion in government hand outs combined with steep fall in mortgage rates.

Yet even the government expects worse to come this year as the global slowdown hits Australia's commodity exports.

"We would be kidding ourselves if we think we are immune from the impact of what is going on in the global economy," a subdued Treasurer Wayne Swan told reporters after the RBA's decision.

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That could be one reason why the central bank decided to hold fire on Tuesday.

"The RBA knows the world economic backdrop is the bleakest for many decades and that unemployment here is going to climb steadily for another year or two," said Rory Robertson, interest rate strategist at Macquarie.

"So they may want to save their ammunition and be able to respond to bad news in coming months," he added. "Ultimately, the RBA will be dragged into cutting to 2.0 percent by year-end."

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